Frequently Asked Question And Answers
What questions should I ask myself before selling my business?
Why am I selling and what is my plan after the sale?
What impact will the sale have on my employees? Am I comfortable with this?
Are my personal affairs in order for me to exit in a comfortable situation?
Do I just want the highest price or are there other considerations that are critical to my approval of a sale?
What are the ways to value my business?
Valuing a business is a combination of science, art, and experience. Thinking about the price as a factor of what you need for retirement has little creditability. Only the marketplace decides true enterprise value. Unrealistic sellers expectations are a key reason businesses fail to sell. It is important to get pricing right from the start. The valuation will only be as good as the numbers used to achieve it. It is best to use as many measures as possible to arrive at a valuation. Generally, several of the approaches described below are employed to arrive at the most probable selling price or a range there of. The better understanding one has of revenues, EBITDA, free cashflows, assets, systems, people and the market, the closer one gets to the company’s true value.
Income approaches– calculating the value of the business based upon earnings using past earnings and/or forecasted cashflows and earnings projections. A discounting or capitalizing method is employed. Used mostly with profitable businesses and those with high growth potential.
Asset approaches – calculate the value of tangible and intangible assets. This approach is best used with asset heavy companies with tight margins and few intangibles and companies in distress. The adjusted net asset method is best employed as assets and liabilities are adjusted to current market values. The asset approach does not look at future earnings growth.
Market based – calculate the value based upon comparable companies that have been sold in the market. Revenues, profitability, industry, products, company size, are key company characteristics which are used in determining similarities between a subject company and those in the marketplace. This approach can provide convincing indications of value as the method is using actual market transactions with similar businesses. A key challenge is identifying similar companies due to lack of data from completed private transactions. Our office has access to paid subscription data bases along with our own knowledge of past sale transactions.
Business valuation calculators – on-line calculators are where you need to input some numbers for a 12-month period such as sales, profit, cost of goods sold and the owner’s wage to compute a value. It is instant, quick, cheap, and possibly easy. Valuation is rarely that simple. Some calculators give asset, liquidation and enterprise and equity values but only market value matters when selling your business. This method does not address important factors including business sector, management team, customer profile, company strengths, market conditions, and future forecasts. They do not address sell ability issues.
Rules of Thumb – these are multiples of revenue, sales, or net income. For example, a rule of thumb might be that x firms are selling at 3 – 4.5 times EBIDTA or 2 – 2.5 times revenue. There can be a lot of variation among rules of thumb providers. They tend to focus more on sales and revenue rather than profitability. They can be useful in generating a ballpark figure for business valuation.
How long does it take to sell a business?
It generally takes 6 – 12 months to sell a private business. Factors that influence the timing include: price, market demand and position of your company within the market, investor perceived growth potential of your company, ability of the purchaser to secure financing, overall economic and conditions within your industry sector, and the smoothness of the negotiations. Sellers need to respond to prospect inquiries in a timely manner with accurate information that is presented in a clear format.
What are the tax implications of Selling My Business?
The various tax implications of selling a business depend on your personal circumstances. CRA made significant proposed changes to taxation rules in 2024 most notably raising the capital gains inclusion rate from 50% to 66.67%. Apart from the purchase price, the real bottom line is the after-tax funds that you retain. It is important to consider the tax considerations before putting your business up for sale.
Is your business a sole proprietor or a corporation? When a sole proprietor sells a business, they are selling the assets of an unincorporated company. Assets can be tangible like equipment, property, or inventory or intangible like customer lists, patents, intellectual property, and good will.
Capital gains apply to the sale of a business based upon the difference between the proceeds and the cost of the assets. If depreciation was claimed on the assets there a recapture of past depreciation (capital cost allowance).
When selling an incorporated business CRA tax treatment depends on whether the sale is a share or asset sale. Each option has different tax consequences. In a share sale, the buyer purchases the shares of the business, and the seller realizes a capital gain or loss based upon the difference between the sale price and the adjusted cost base of the shares. All parts of the incorporated business are sold. Sellers often prefer a share sale. Sellers can qualify for the tax-free capital gain up to $1,016,836 in 2024 on the sale of qualified small business corporation shares. If your business is not incorporated, you may want to consider doing so before a sale to enable eligibility for the free lifetime capital gain.
In an asset sale the seller sells the business assets individually, resulting in different tax treatment of different assets. An asset sale can be more complex. Buyers often prefer assets sales as they can only purchases the assets they want and can possibly avoid taking on any corporate liabilities such as legal, financial, or contractual obligations of the past owner. Buyers may benefit from a step-up in the tax basis of the purchased assets resulting in enhanced depreciation and future tax savings.
It is possible to do a hybrid of a share sale and an asset sale with the overall goal of creating an acceptable balance of benefits and costs to the buyer and the seller. The income tax act also provides for options for business owners to sell to the next generation or to sell to employees through an ownership trust.
It is critical to get good tax planning advice. CRA does not give advice but provides general information they are required to communicate to taxpayers.